Estimated impact of selected policy reforms on government revenues: final report

In February 2016, Infrastructure Australia (IA) presented its Australian Infrastructure Plan to the Australian Government, detailing the economic impact of proposed policy reforms through changes to gross domestic product (GDP), GDP per capita and GDP per household. As an input into the Australian Infrastructure Plan, PwC prepared a report for IA entitled Modelling of Potential Policy Reforms (‘PwC’s previous report’). IA is now preparing advice on the practical next steps for governments to implement these reforms. Specifically, IA is currently developing a research paper on the potential economic returns of five proposed policy reform packages to make a case for the Australian Government to implement an Infrastructure Reform Incentives framework. Hence IA is interested in understanding the potential revenue gained (through taxation) by the Australian Government, States and Territories resulting from the proposed policy reforms.

PwC was engaged to undertake this analysis using economy-wide economic modelling. These impacts have been modelled for each reform package individually and for the cumulative impact of all five reform packages being implemented concurrently. This analysis has been undertaken by employing assumptions that are necessarily high-level and so the results of the analysis should be viewed as indicative of the possible scale of impact on the Australian economy. This initial assessment of the potential taxation revenue gained as a result of the proposed reforms is intended to identify the broad scale impacts; not to be a cost benefit analysis (for example we have not included the transaction costs involved in the sale of publicly owned energy and metropolitan water assets).

PwC’s modelling relies on assumptions made about the direct impacts of the reforms. For example, assumptions are required, informed by a range of data sources, regarding by how much the costs of congestion can be reduced by undertaking transport sector reforms. We assisted IA by researching possible direct impacts of the reforms and then discussed the scale of impacts possible, with IA deciding on the appropriate assumption for the purposes of this modelling exercise. These direct impacts have been estimated as the productivity benefits that could be possible from such reforms but given the actual form or timing of reform may differ from what is modelled here, the results reflect proxy productivity benefits that might be achieved in other ways.

Our modelling approach uses a Computable General Equilibrium (CGE) model, specifically the Victoria University’s Centre of Policy Studies dynamic CGE model. The CGE model is based on Australian Bureau of Statistics (ABS) input-output data which details the various income and expenditure components that comprise Australia’s GDP. Using this model and PwC’s forecasts of economic growth and out to 2047 which are encapsulated in our Intergenerational Fiscal and Economic Model (IFEM), we can estimate the deviation in revenue received by the Australian, State and Territory Governments from a baseline as a result of the reforms. An overview of the CGE and IFEM models can be found in the Appendices in PwC’s previous report.

This report sets out the findings of this latest analysis. Of the five proposed policy reform packages included in this report, four were analysed in PwC’s previous report, with new analysis on stamp duty reform included in this report. Therefore, there is substantial overlap in the explanation of these reforms and the associated research into the potential impacts these may have on the economy. The current report should be read in conjunction with the previous report and cross references are made where necessary to avoid duplication. The remainder of this report is structured as follows:

Chapter 2 – Explains the modelling approach with reference to how PwC’s previous report has been updated and modified.

Chapter 3 – Summarises the results of analysis undertaken for each of the reforms individually and in total.